All Eyes on Reform

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It’s a paradox: For years, CFOs have bemoaned the continually rising cost of health care and have spent countless hours assessing what percentage of those costs can be passed through to employees. Yet when talk turns to reform efforts, many CFOs are lukewarm about the prospect, if not openly hostile.

Finance chiefs know the cost of health care is squeezing their margins at a time when they can ill afford it; in some industries it affects their ability to compete on a global scale. But their widespread skepticism of government intervention has set many against reform. Is that an entirely appropriate stance born of painful experience, or a knee-jerk response that may ultimately harm their companies?

Few would argue that something must change. That in itself is a notable difference from 1994, when the last major push for reform went up in smoke. “Businesses know that health-care costs are eating them alive,” says Len Nichols, director of the health policy program at the New America Foundation, a think tank based in Washington, D.C.

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At a time when they plan cuts or freezes in nearly every other spending category, CFOs predict a 6% rise in health-care costs over the next 12 months, according to the most recent Duke University/CFO Magazine Global Business Outlook Survey. At small businesses, which typically have less bargaining power than large employers, respondents anticipate even bigger hikes, and some studies suggest increases as high as 14%.

That creates an undeniable sense of urgency, but the feeling that something must be done has not translated into much overt advocacy on the part of companies.

There are some exceptions, however. Wal-Mart Stores, the nation’s largest private-sector employer, joined the health-reform debate in 2007, helping to found a group called Better Health Care Together, a surprising coalition of large companies, unions, and public-policy organizations. The group, which includes General Mills, Kelly Services, Qwest Communications, and Intel, as well as the Service Employees International Union and the Center for American Progress, a liberal think tank, has come out in support of health reform. “Wal-Mart is a company that is historically politically conservative and that has typically stayed out of this kind of controversial public fray,” says Nichols. “But they have small margins, and health-care costs are eating those margins.”

While Wal-Mart has staked out a high-profile role in support of reform, others in the business community also quietly acknowledge the need for change. “The U.S. health-care system, for whatever reason, is horribly inefficient,” says Wade Miquelon, finance chief at Walgreen, the national drugstore chain. “We’re on board with the fact that reform of some type has to happen. The current system is not sustainable.”

Continually climbing costs have some finance executives worried about what they are giving up to pay for health care, and what that opportunity cost means for their companies’ competitiveness. “Health-care costs are increasing faster than pretty much any other component of our cost structure,” says Rob Schriesheim, finance chief at Lawson Software. “As those costs — which make up more than 8% of our total employee salary expense in the U.S. — continue to rise, they have the potential to crowd out investment in other areas and ultimately make us less competitive.”

Lawson has increased its overseas workforce over the past three years, with a quarter of its employees now based in the Philippines. While Schriesheim says U.S. health-care costs were not the reason for the shift, he adds, “[The Philippines] is a much lower-cost operation, and health care factors into the overall cost.”

Cost-cutting is not, of course, the only reason that executives believe reform would be beneficial. “All the [money] we’re spending on health care as a country means that we’re spending very little on education,” says Eric Dishman, director of health innovation and policy at Intel and co-founder of the company’s digital health group, which has developed remote-health-monitoring technology. “We believe health-care reform is needed, it needs to be significant, and it needs to be now.”

“It’s hard for me to imagine how this reform is bad for business in the long run,” says Marty Welch, the former CFO of United Rentals, who just finished a stint as chair of the audit committee at auto-parts maker Delphi, which has struggled with its benefits costs amid the industry’s declining fortunes. “It will make U.S. companies more globally competitive by ‘bending the cost curve’ as well as spreading the cost of caring for the uninsured over a broader base.”

Dishman says he hears this sense of urgency from others as well. “I can’t think of anyone I’ve met with in the last six months who says we shouldn’t be doing reform. That is a very, very big difference from the last time around.”

True, these CFOs also see business opportunities in reform. Intel is eager to offer its technology for home-based health care as a way to reduce costly doctor’s appointments or emergency-room visits. Lawson Software, which already derives 25% of its revenue from the health-care market, hopes more hospital systems and health-care networks will turn to its ERP systems for back-office support. And Walgreen, which operates health clinics at more than 700 locations (including 375 on corporate campuses), could expand that business if health reform includes incentives for more clinic-based routine care. “If more people are covered under some government umbrella, that is probably good for us, although there are likely to be [pressures to keep costs down], too,” says CFO Miquelon.

Uncharted Territory

Despite the acknowledged need for change and the possibility of new business opportunities from a reformed health-care system, apprehension remains. Some finance executives fear that health reform will cost their companies more money, because they suspect that insurers will raise their rates to offset any potential new taxes or pricing restrictions. Others are concerned that reform may require complicated changes or restrictions to their plans. Still others worry that expanding coverage will increase the federal deficit and have an indirect effect on their businesses by causing inflation.

“Some people have a general skepticism about government. They’re not confident that anyone knows how to contain costs,” says Nichols. “CFOs like control rather than a lack of control, and they fear that some versions of a national plan would take away their control.”

Further fueling the anxiety about reform is the vast complexity embedded in competing plans. “Many people are worried about things that probably aren’t applicable to them,” says Nichols. “Nobody is talking about making most companies do anything different than they’re doing today. All of the proposed exchanges and new marketplaces are for people who don’t have coverage, and small firms that don’t have coverage.”

None of the plans that emerged from congressional committees proposed either a single-payer system, in which a government plan would overtake the current private system, or an employer mandate, in which firms would be required to offer health-care coverage for employees. Employers would not be obligated to offer insurance, but those above a certain employee or revenue level could face a per-employee fee if any of their workers required government subsidies to buy insurance on their own.

“Our understanding is that a firm our size that offers health care would not be significantly impacted or have to do anything differently,” says Marty Moore, CFO at SVP Worldwide, maker of Singer sewing machines. Refuting the idea that the option of a government plan would prompt employers to drop their own health-care coverage for employees, Moore says, “Whatever Congress concocts, we’re going to have to continue to offer a competitive policy. We see health care as an incredibly important recruitment and retention benefit.”

Still, Moore says he worries that expanding coverage to a broader base may cause inflation, as he anticipates a shortage of health-care professionals to provide treatment to the additional 30 million or more people who would be insured under the final remaining bills.

Others are skeptical that any of the surviving bills do enough to control costs. “If we are going to make a significant dent in the number of uninsured, the proposed reforms are not going to make enough of an impact on the cost,” says Michael Widmer, president of the Massachusetts Taxpayers Foundation and an active participant in that state’s 2006 health-care reform. “I think it’s going to cost some money. And the costs usually come up front, while any savings are often illusory or don’t come for some time.” Investments in medical technology or prevention campaigns, for example, can require substantial initial expenditures and may take years to show a return. Prevention programs may result in care not needed — a difficult savings to measure.

“Expenditures will go up because more people will be covered,” says Stephen Davidson, faculty director of the Health Care Management Research Center at the Boston University School of Management. “But there may be some countervailing cost savings.” With expanded coverage, more people will likely see their doctors for preventive or routine care, rather than relying on expensive emergency-room services. “Also, many young people are not covered [and tend to be] relatively healthy,” Davidson adds. “If they were in the risk pool, it would reduce per-capita costs.”

The nonpartisan Congressional Budget Office found that the reforms proposed in the Senate Finance Committee bill would reduce the deficit by $81 billion over 10 years. “There are some really good things in these bills,” says Dishman. “There are hints at payment reform. There are hints at delivery reform. There is discussion of care coordination.”

“The bills on the table now [address] Medicare cost growth containment,” Nichols says, “which is the key to the system because Medicare drives the behavior of hospitals and doctors. The private sector is not a big enough buyer to do that. They’ve tried for years and failed.” Medicare, Medicaid, and the Children’s Health Insurance Program, on the other hand, accounted for more than 40% of total health-care spending in the United States in 2007.

The idea of spending money now for an uncertain future return on investment is a difficult pill to swallow for many CFOs, most of whom have just come through the most grueling year of their professional lives. “If we measure our ROI quarter by quarter, we’ll never do this,” says Dishman. “But if we get more people to stop smoking, it will pay off. If we have better disease management, it will pay off. You just can’t measure it quarter by quarter.”

As CFO went to press, a final bill had yet to be signed into law. But even if a version of reform passes, as experts on both sides of the aisle anticipate, it will take years for the impact to be fully understood; the major provisions included in the reform proposals won’t take effect until 2013.

Some finance executives will never support the changes, viewing them as a government intrusion into something corporations and individuals should handle on their own. Others may grow more comfortable with the idea of reform once they see what the final plan looks like, and some, no doubt, will want to see better data about the efficacy of reform before they take a firm stand.

But for those who believe the health-care system is holding back their companies — and even the country — there is an eagerness for change. “Health-care reform is one of the keys to a vital future,” says Walgreen’s Miquelon. “We can’t have that burden on our economy.”

Kate O’Sullivan is a senior writer at CFO.

A Test Case

Massachusetts passed major health-reform legislation three years ago with the goal of expanding coverage. How has it fared?

In 2006, under Republican governor Mitt Romney and a heavily Democratic legislature, Massachusetts passed a health-reform bill aimed at providing universal coverage to its citizens. The law required that individuals either have coverage through their employers or purchase it on their own (sometimes with subsidies), an approach that has inspired some current national proposals.

Three years later, says Michael Widmer, president of the Massachusetts Taxpayers Foundation, the number of insured in Massachusetts has increased by more than 400,000 people, dropping the percentage of uninsured to 2.6% by August 2009. The cost to taxpayers has been in line with the state’s projections, with an average additional cost each year of $88 million out of a total state budget of $30 billion.

To some degree, the Massachusetts experience is atypical: the state is historically liberal, and residents have been more supportive of universal coverage than the broader U.S. electorate. More notable, perhaps, is the fact that the business community was also committed to working for reform.

Jim Klocke, executive vice president of the Greater Boston Chamber of Commerce, says that so far businesses like what they see. “There’s a rumor, which is totally incorrect, that it has broken the state budget,” Klocke says. “In fact, it has completely tracked expectations.”

There are some major differences between Massachusetts’s reform and national reform, however. More than 90% of the Bay State’s population already had insurance prior to reform, compared with 87% nationwide. On a national level, more people will need subsidies. Massachusetts also had access to federal matching funds, which a national plan clearly would not have. And despite having a Republican governor and a Democratic legislature, the state enjoyed a less divisive political climate. — K.O’S.